1. The Income-tax Appellate Tribunal has, at the instance of the revenue, referred the following questions for our opinion under s. 256(2) of the I.T. Act, 1961 (hereinafter referred to as

"the Act"

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only Rs. 67,190 out of Rs. 1,07,266 earned by the assessee is liable to be brought to tax in the assessment year 1971-72 in question and the balance of Rs. 38,539 was rightly taxed by the Income-tax Officer in the assessment year 1970-71 ?

2. Whether the assessee is entitled to value its rights to purchase the land and, consequently, deduct Rs. 38,539 declared as income in the assessment year 1970-71 form the income for the assessment year 1971-72 ?

3. Whether the assessee was justified in working out the notional profit for the assessment year 1970-71, in respect of closing stock, when the assessee had not owned any land but had acquired only the right to purchase the land ?"

2. The assessee is a partnership firm which was constituted on July 4, 1968. The firm is constituted to carry on business of purchase and sale of land. In other words, the assessee-firm is a dealer in land. It entered into an agreement dated July 4, 1968, with M/s. Shah & Co. for purchase of 1,07,266 sq. ft. of land at the rate of Rs. 2-15 per sq. ft. The price of the land at the above rate worked out to Rs. 2,30,622. Under agreement, M/s. Shah & Co. agreed to execute the sale deed in favour of the assessee-firm on or before May 25,1969. It, however, appears that the time for the execution of the sale deed was extended from time to time. On November 7, 1969, two days before the close of Samvat year 2025, the assessee-firm entered into an agreement for sale with Mai Krupa Co-operative Housing Society Ltd. (hereinafter referred to as the "Society"). It may be mentioned here that Samvat year is the year of account of the assessee-firm. The assessment year, relevant to Samvat year 2025, is 1970-71. Under the agreement dated November 7, 1969, the assessee-firm agreed to sell the land at Rs. 3.15 per sq. ft. The land was sold to the society by M/s. Shah & Co. on June 26, 1970, which falls within Samvat year 2026, the year of account relevant to the assessment year 1971-72. The assessee-firm joined in the execution of the sale deed executed by M/s. Shah & Co. as a confirming party, as M/s. Shah & Co. had agreed to sell the land to it under the agreement dated July 4, 1968, referred to above. It is not in dispute that the assessee-firm did not purchase the land. In other words, it never became the owner of the land. As pointed out above, it merely entered into an agreement to purchase the land from M/s. Shah & Co. and in turn executed the agreement dated November 7, 1969, to sell the land to the society at the rate of Rs. 3.15 per sq. ft. The society purchased the land for Rs. 3,37,888. As pointed out above, M/s. Shah & Co. had agreed to sell the land to the assessee-firm at Rs. 2,30,622. Therefore, as a result of the above transactions, the assessee-firm earned a profit of Rs. 1,07,266. The question which arises for our consideration is whether the entire profit earned by the assessee-firm is chargeable to income-tax in the assessment year 1971-72 ?

3. The assessee-firm treated the right which it acquired under the agreement for sale with M/s. Shah & Co. as its stock-in-trade, and valued such stock at the end of Samvat year 2025. As pointed out above, the total area of the land which the assessee-firm had agreed to purchase was Rs. 1,07,266 sq. ft. The assessee-firm valued its right to purchase this land at 37 paise per sq. ft., i.e., at Rs. 39,688, at the end of Samvat year 2025, its year of account relevant to the assessment year 1970-71. After deducting expenses, the profit or income for the assessment year 1970-71 was worked out at Rs. 38,539, which was disclosed by the assessee-firm in its return of income for the assessment year 1970-71. The ITO in his assessment order for the assessment year 1970-71 held to the effect that since the assessee-firm had not acquired any title over the land which it had agreed to purchase, the profit or income shown by the assessee-firm in its return of income for the assessment year 1970-71 did not fall for consideration in the said assessment year. However, since the assessee-firm itself had filed a return disclosing an income of Rs. 38,539, the ITO computed the total income of the assessee for the assessment year 1970-71 at Rs. 38,539 as a protective measure.

4. As already stated, the sale in favour of the society was computed in Samvat year 2026, the previous year relevant to the assessment year 1971-72 resulting in a gross profit of Rs. 1,07,266 to the assessee-firm. Since the assessee-firm had disclosed an income of Rs. 38,539 in the assessment year 1970-71 in its return of income for the assessment year 1971-72, it disclosed Rs. 67,190 after deducting expenses as income arising from the above transaction.

5. The ITO did not accept the bifurcation of profit made by the assessee-firm. He was of the view that the assessee-firm having not acquired any title over the land, it did not possess any stock, which it could have valued in the manner it had done at the end of the year of account relevant to the assessment year 1971-72. The ITO held that the profit which the assessee-firm had earned out of the above transaction was the difference between the price at which M/s. Shah & Co. had agreed to sell the land to it and the price at which the land was sold to the society. According to the ITO, the entire profit accrued in the year in which the sale was completed, that is, in the year of account relevant to the assessment year 1971-72. He computed the profit at Rs. 1,07,266 and after deducting expenses of Rs. 380 therefrom, he brought Rs. 1,06,866 to tax in the assessment year 1971-72.

6. Feeling aggrieved by the assessment framed for the assessment year 1970-71 and 1971-72, the assessee carried the matter in appeal before the AAC. The AAC agreed with the view taken by the ITO and rejected the claim of the assessee-firm that it had earned a notional profit of Rs. 38,539 in the assessment year 1970-71. He held that the entire profit arising out of the above transaction was earned by the assessee-firm in the year of account relevant to the assessment year 1971-72, and it was liable to be assessed in the assessment year 1971-72. In the result, while setting aside the assessment made by the ITO for the assessment year 1970-71, the AAC confirmed the computation of the assessee's income at Rs. 1,06,886 made by the ITO in the assessment for the assessment year 1971-72.

7. Both the revenue and the assessee-firm carried the matter in further appeal to the Income-tax Appellate Tribunal. The revenue preferred an appeal against the order of the AAC, setting aside the protective assessment for the assessment year 1970-71 made by the ITO by way of abundant caution in case the assessee's claim for bifurcation of the profits in the two assessment years, as stated above, was accepted by the Tribunal. The Tribunal by its judgment and order dated April 18, 1975, held to the effect that the right which the assessee-firm had acquired under the agreement for sale from M/s. Shah & Co. was its stock-in-trade and it was open to it to value such stock as it had done at the end of the year of account relevant to the assessment year 1970-71. In the view of the Tribunal, the right which the assessee had acquired under the said agreement was a valuable right and the assessee-firm was fully justified in showing the value of such right as closing stock. In the result, the Tribunal held that the income of Rs. 38,539 was rightly taxed by the ITO in the assessment year 1970-71. The Tribunal further held that an income of only Rs. 67,190 and not Rs. 1,06,866 was liable to be taxed in the assessment year 1971-72. In the view it took, the Tribunal allowed the appeals filed by the revenue and the assessee-firm. It is in the background of the above facts that the questions as set out above have been referred to us for our opinion.

8. In our opinion, the reasoning of the Tribunal proceeds on a basic misconception. The facts, which are not in dispute, show that the assessee-firm never purchased the land which it had agreed to purchase under the agreement with M/s. Shah & Co. In other words, it did not acquire right, title or interest in the land. The assessee-firm was admittedly a dealer in land and if, in the course of business, it acquired land, such land would certainly be its stock-in-trade. It, however, did not acquire any land and, therefore, it did not have any stock in the year of account relevent to the assessment year 1970-71. The stock which the assessee has contracted to purchase and which might have been appropriated to the contract but the property in which has not passed to the assessee cannot be regarded as the assessee's trading stock "in hand", and should not, as a general rule, be valued in the accounts as such (vide Benjamin Smith v. IRC [1928] 139 LT 97). The agreement which the assessee-firm had entered into with M/s. Shah & Co. might not have materialised. M/s. Shah & Co. might not have sold the land to it or its nominee. Unless the assessee-firm acquired the land, it could not be said to have any stock. Before a stock could be valued, it must be in existence. In the instant case, all that the assessee-firm did was to enter into an agreement with M/s. Shah & Co. to purchase in certain land, which in fact it did not. Had the sale been completed in favour of the assessee-firm, it would have acquired land or stock-in-trade, but unless and until the sale was complete, it had no stock which could be said to have come into existence and which could be valued. The Tribunal, it would seem, labouring under a basic misconception, has fallen into an error in reaching the conclusion that the assessee-firm had acquired a valuable right under the agreement with M/s. Shah & Co. and such right was its stock which could be valued. There was no stock at all and, consequently, the question of valuing it did not arise. The profit which accrued to the assessee was a result of the sale transaction in favour of the society. The sale deed was executed by M/s. Shah & Co. in favour of the society on June 26, 1970, in pursuance of the agreement which the assessee-firm had entered into with the society. The difference between the price at which the assessee-firm had agreed to purchase the land and the price at which it was sold to the society represented the profit of the assessee-firm. This profit or income was earned by the assessee-firm only when the sale deed was executed in favour of the society. The entire profit was earned in the year of account relevant to the assessment year 1971-72. As already pointed out above, there being no stock in existence, the assessee-firm could not have valued such stock in the year of account relevant to the assessment year 1971-72 and disclosed any profit on the basis of such valuation in its return of income for the assessment year 1970-71. Bifurcation of profit in the manner done by the assessee-firm is not permissible in law.

9. We may also point out that as laid down in Chainrup Sampatram v. Commissioner Of Income Tax, West Bengal. [1953] 24 ITR 481 (SC) it is a misconception to think that any profit "arises out of the valuation of the closing stock" and the situs of its arising or accrual is where the valuation is made. Therefore, even assuming that the assessee-firm had stock at the close of the year of account relevant to the assessment year 1970-71, no profit could be said to have arisen out of the valuation of such stock. As pointed out above, the assessee-firm valued its right under the agreement with M/s. Shah & Co., which it treated as its stock and valued at 37 paise per sq. ft., i.e., Rs. 39,688. As a result of such valuation, it disclosed the profit of Rs. 38,539. As observed above, no profit could be said to arise on account of the valuation of the closing stock. The valuation of the unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period and can in no sense be regarded as the situs of their accural. The Tribunal's reasoning in holding that a profit arose to the assessee-firm on account of the valuation of its closing stock proceeds on a misconception. Therefore, on this ground also, the view taken by the Tribunal cannot be upheld. No income was earned in the previous year relevant to the assessment year 1970-71 and, consequently, there was no question of bringing any income to tax in the assessment year 1970-71. The AAC was, therefore, right in setting aside the assessment for the assessment year 1970-71.

10. The entire profit or income of Rs. 1,06,886 as computed by the ITO, for which there is no dispute, accrued to the assessee-firm in the assessment year 1971-72 and is taxable in that year. We, therefore, agree with the view taken by the ITO and the AAC that this income of Rs. 1,06,886 was taxable in the assessment year 1971-72. The Tribunal, in our opinion, has fallen into an error of law in setting aside the assessment for the assessment year 1971-72 and bringing to tax Rs. 38,539 in the assessment year 1970-71 and Rs. 67,190 in the assessment year 1971-72.

11. In the result, we answer the questions referred to us as follows :